When Chinese authorities cut their reserve bank requirements earlier this month, it was an early signal that all was not well with the Chinese economy, however even allowing for that action, the extent of the deterioration in the latest December trade numbers were still shocking in terms of the sharpness of the slowdown.
A decline in exports to two of its biggest markets in Germany and Japan, not only raises the prospect of a wider slowdown globally, but the sharp decline in imports also points to a domestic slowdown as well.
The deterioration also points to the prospect that both Germany and Japan could well have entered recession in Q4, given that both economies also contracted in Q3. Against that backdrop it seems highly probable that we could well see further action in the weeks ahead from Chinese authorities, in the form of a rate cut, to cushion the effects of the slowdown as we head towards Chinese New Year.
It is therefore not too surprising to see that both European markets and US markets underwent modest pullbacks yesterday in the wake of the poor Chinese numbers, as well as a pretty awful Eurozone industrial production number, though the declines were fairly modest in the context of the rebound seen in the past two to three weeks from the recent lows.
This modest reaction would suggest that for the most part some of the weakness may already be priced in, with an expectation that central banks are likely to hold back from further tightening measures. This has been borne out by the reaction in Asia markets this morning which have rebounded after Chinese authorities announced a series of tax cutting measures to support certain areas of the Chinese economy including reducing income tax on small and micro sized companies. This recovery in Asia is likely to translate into a higher European open this morning.
The pound is set for a potentially choppy next few days as head towards today’s so-called meaningful vote by MPs on Prime Minister Theresa May’s Brexit withdrawal agreement. It has been suggested that if the PM loses the vote badly, which looks highly likely she would have to step down, though its not immediately clear, who would replace her.
The PM was at pains to set out yesterday that if the deal is voted down later this evening then there would be the real possibility that Brexit may well not take place. The pound also appears to be trading on that basis given yesterday’s sharp move higher on a report that the Conservative Eurosceptic ERG group might vote for the deal.
While this optimism is welcome it doesn’t exactly chime with the facts of the matter, which are that in the absence of any new legislation to the contrary, the UK will be leaving the EU on the 29th March this year, as it is already signed off in law.
MPs can argue until they are red in the face that there is no majority in the House of Commons for a “no deal” Brexit, but that is exactly what they are voting on today, given that the current choice is between PM May’s deal and no deal, given the lack of an alternative deal.
What MPs are really arguing about at the moment is on what terms we leave, even if there are some who want to reverse the decision. All the rest of it is noise as any attempt to reverse the Brexit legislation will need a consensus in the House of Commons, to pass new legislation to stop Brexit, and there has been precious little of that in the last few months, which means for all the noise about the likelihood of a no Brexit, such a scenario would still need a majority of MP’s to vote for that to happen. One should ask whether that seems likely given the current parliamentary arithmetic?
A consensus would also be needed on any alternative customs deal or variant thereof, as well as a decision to push through a second referendum or an extension of article 50. Thus far the only thing we have heard from MPs is what they don’t like and precious little on what they do agree on.
Of course, we could get a situation where the vote gets passed, but given the polling numbers that looks about as likely as finding a unicorn.
For the here and now the most likely outcome remains a rejection of the deal and then the prospect that we might see the opposition Labour Party call a vote of no confidence in the government, which may or may not succeed. The Prime Minister would also face the prospect of outlining a Plan B for MPs within the next week, depending on how badly she loses the vote, assuming of course that she even has one.
EURUSD – after failing last week at the 1.1570 area we could well fall further towards the 1.1420 area. If we fall below the 1.1420 area we could see further weakness towards the 1.1360 area. We could still head towards the 1.1600 level, and potentially the 200-day MA at 1.1640, if we can hold above the 1.1420 area or last Tuesday’s low.
GBPUSD – the pound hit a two-month high yesterday, as it pushed up to the 1.2930 area. A move back below the 1.2800 area reopens the prospect of a move back to 1.2680. A move below 1.2400 retargets the 2016 lows near the 1.2000 area.
EURGBP – continues to lose ground from this month’s high at the 0.9100 level, falling back from the 0.9070 area. Yesterday’s move down through the 0.8900 area has the potential to reopen up a move towards 0.8870 initially and then the 0.8820 area.
USDJPY – while below the 109.20 area the US dollar is susceptible to a move back towards the 107.50 area, and back down towards the 106.00 area, towards the lows at 104.60. We need to recover back through the 109.20 area to argue for a return to the 110.30 area.